(a) That current accelerated depreciation arrangements be replaced with
a system under which the rates of taxation depreciation for depreciable assets acquired
after the commencement date be determined by the effective life of the asset in line with
Recommendation 8.5.

Application from date of announcement

(b) That accelerated depreciation no longer apply to assets acquired
under contracts entered into after the date of announcement.

(c) That assets acquired before the date of announcement retain their
existing treatment in respect of the rate of write-off.

Simplified arrangements for small business

(d) That paragraphs (a) to (c) not apply to relevant depreciable
assets of small businesses that decide to use the simplified depreciation system under
Recommendation 17.3.

Retention of specific primary producer provisions

(e) That paragraphs (a) to (c) not apply to specific primary producer
provisions such as those relating to horticultural plantations, grape vines and water
assets.

Removing accelerated depreciation will facilitate tax reform in the following three
ways. It will:

 provide revenue to finance a reduction in the company tax rate to
30 per cent (see Recommendation 11.9);

 improve investment decision making by removing tax-induced
distortions in investment decisions; and

In APlatform for Consultation (page 118), the Review noted that
accelerated depreciation provides significant benefits to capital-intensive industries
such as mining and manufacturing while being of little benefit to service industries such
as finance, tourism or retailing. This means that (scarce) resources may be diverted away
from activities that, in a tax-neutral environment, would have otherwise attracted them.

The implications for the economy of removing accelerated depreciation are difficult to
gauge. In the absence of other specific government intervention (through outlays, for
example), it is possible that some (perhaps significant) marginal projects may not
proceed. It is also possible that other investment decisions may be deferred or shelved.
The Review notes, however, that the Government has in place processes that can
specifically and directly assist projects considered to be in the national interest.
Nevertheless, the impact from the removal of accelerated depreciation could be that the
level of investment, employment, and activity in the more capital-intensive sectors of the
economy might decline. It would be more efficient to subsidise directly projects of major
national significance, if such projects would not otherwise proceed, as a budget
expenditure than to maintain accelerated depreciation generally -- at the cost of forgoing
a lower company tax rate.

The effect of eliminating acceleration needs to be balanced against the possibility of
increased activity in other (less capital-intensive) sectors that will benefit from the
lower company tax rate. The Review has endorsed an accelerated depreciation/company tax
rate reduction trade-off, but found the decision to be a very difficult one. Ultimately it
is a matter of judgment as to which option will provide the best outcome for the economy.

Removing accelerated depreciation will do much to improve the integrity and structure
of the tax law. It will provide the following benefits:

 It will remove the need to define the policy and legislative
boundaries between those assets that qualify for accelerated depreciation and those that
do not. For example, plant and equipment (as defined in the tax law), excluding cars,
benefit from accelerated depreciation, but intangible assets do not.

 It will reduce the need for complex anti-avoidance rules. For
example, section 51AD of the 1936 Act was primarily a response to the indirect
accessing of accelerated capital allowances by tax-exempt bodies. Removing accelerated
depreciation will remove the need for complex leasing rules to police the boundary between
taxable and non-taxable entities.

A clear majority of submissions favoured a reduction in the company tax rate over
continuation of accelerated depreciation.

In contrast, capital-intensive firms generally favoured retention of accelerated
depreciation while submissions from the services sector generally favoured its removal.
Where analysis was provided, the trade-off was shown to lower the after-tax rates of
return for capital-intensive investments and it was suggested that the removal of
accelerated depreciation could result in some investments not proceeding.

Some submissions argued that accelerated depreciation was necessary because the
effective lives of some investments were uncertain due to changing technology or other
factors that could influence the rate of obsolescence. The Review noted these concerns and
considers that taxpayers should be permitted to re-assess the rates of write-off of assets
over their period of use to address such problems. Focus group participants agreed that a
better structured and more flexible depreciation regime would make the removal of
accelerated depreciation more acceptable (see Recommendation 8.6).

The Review is recommending that accelerated depreciation be removed with immediate
effect. This means that all plant and equipment that was not acquired by the taxpayer
under a contract entered into before the time and date of the announcement would be
taxable under the new regime. It also means that all plant and equipment acquired before
the date of effect would continue to be eligible for taxation depreciation that applied at
the time of acquisition.

The recommendation for immediate effect is consistent with past practice where changes
to capital allowance arrangements have been made - as was the case, in May 1988,
when the 5/3 depreciation arrangements were replaced with a regime of effective life
plus a 20 per cent loading.

In the absence of immediate implementation, there is a significant risk that taxpayers
might bring forward investment decisions and enter into contracts for acquisitions beyond
the date of implementation, at a cost to the revenue.

In addition, the immediate removal of accelerated depreciation would help finance the
subsequent company tax rate cut.

Under Recommendation 17.3, small businesses electing to use the simplified tax system
(STS) -- which includes simplified depreciation arrangements --will continue to
be eligible for accelerated depreciation until the relevant legislation enacting the new
arrangements is implemented.

Details of how the simplified depreciation system will operate as part of the STS,
including relevant transitional arrangements, are contained in Section 17.

(i) be consistent across the range of different types of depreciable
assets; and

(ii) where not consistent, have a transparent basis for that differential
treatment.

Specific primary producer provisions retained

(b) That specific primary producer provisions continue to apply where
they depart from the uniform treatment being proposed.

It was noted in A Strong Foundation (page 38) that the existing legislation
contains over 37 different types of amortisation regimes, all aimed at providing annual
write-off allowances for `depreciable assets'. Rationalisation of these provisions would
offer significant simplification benefits.

Options to reform the taxation of depreciable assets were canvassed in Chapter 1
of A Platform for Consultation. The Review noted that the present system of
dealing with the taxation of depreciable assets is complex, inconsistent and involves
significant replication. A new system structured upon a common set of principles was
proposed.

Respondents to A Platform for Consultation generally recognised the need
for, and the potential benefits of, a more consistent approach to the taxation of
depreciable assets. The major area of disagreement concerned the removal of the balancing
charge offset.

The Review has recognised that some variations to the consistent approach will be
necessary for policy reasons -- including commitments to preserve the current
treatment for particular taxpayers, to enable the implementation of a simplified tax
system for small businesses (see Section 17), as well as to protect the revenue.

That the entitlement to the write-off of depreciable assets for taxation
purposes be given to the taxpayer who incurs the loss in value of the asset, not
necessarily the legal owner of the asset.

Under the existing law, entitlement to depreciation allowances for plant and equipment
depends on the taxpayer being the legal owner of the asset. Most other capital allowances
do not have a `legal ownership' condition.

The legal ownership test has caused difficulties where the asset is a tenant's
fixture - because the landowner legally owns fixtures on the land - and where
doubt exists about whether the person with the real economic interest in the asset
qualifies as an owner.

The recommendation will ensure that only one eligible person would be entitled to tax
depreciation with respect to an asset or interest in an asset. An eligible person (or
economic owner) will be the person having the capacity to benefit from the asset and able
to deny or regulate access by other entities to the future economic benefits that the
asset embodies.

Consequently, persons will be entitled to tax depreciation in the following cases.

 A tenant who installs fixtures on a landlord's premises.

 A hire purchaser of a depreciable asset.

 A person who does not have legal title only because title is held
as security under a chattel mortgage.

 The beneficiary of the interest in an asset, the legal title in
which is held by a trustee under a bare trust.

 Persons who hold assets jointly such as co-owners or joint venture
partners. Such taxpayers would be able to write off the cost of their share of depreciable
assets regardless of how they paid for those shares.

The existing income tax law is deficient because, in some circumstances, it does not
recognise all expenditures incurred in acquiring or installing depreciable assets. Some
non-financial costs are not included in the initial tax value, even though they contribute
to the enduring value of the physical asset itself. With buildings and structures, the
cost to the taxpayer is linked to the construction cost rather than to the expenditure
incurred by the person who acquires the asset. In some other circumstances, the existing
law allows immediate expensing for expenditure incurred in acquiring or installing
depreciable assets.

Under the full absorption cost approach proposed for determining the tax value of an
asset - including depreciable assets - all non-financial costs of acquiring and
installing an asset will be included in its cost base. Full absorption costing is
consistent with the accounting approach for the determination of the cost of assets.

The principles to determine the cost of an asset for tax purposes are discussed under
Recommendation 4.18.

Net plant commissioning costs incurred as part of the installation process should be
included in the cost base of a depreciable asset rather than being expensed. Under this
approach, where income has been earned during the commissioning phase, such income would
reduce the cost of commissioning rather then being taxed immediately.

Other costs incurred after commissioning to bring an item of plant to full production
would be fully deducted as incurred.

The Parliament recently passed into law (Act 93 of 1999) provisions aimed at
ensuring that the assets sold by tax-exempt government-owned enterprises are valued
appropriately for taxation purposes.

It was noted in the accompanying Explanatory Memorandum that, given the magnitude and
complexity of some of the privatisation transactions,

there exists some potential or opportunity for shifting value from the non-depreciable
assets including intangibles into the depreciable assets. This risk may be increased where
the vendor is, from a taxation perspective, disinterested in the proportion of the total
business price which is attributed to the cost or termination value of the depreciable
assets as it is of no taxation consequence for the exempt vendor in terms of a balancing
adjustment or capital gains tax.

As the provisions are designed for revenue protection reasons, the matter is a policy
issue for the Government.

Because of the potentially large cost to the revenue of allowing all buildings and
structures to be depreciated on the basis of their acquisition cost and effective lives
upon resale, the Review is recommending that the current taxation treatment continue to
apply to existing properties (see Recommendations 8.12 to 8.14).

Many taxpayers refer to the Commissioner of Taxation's depreciation rate schedule to
determine the rate of write-off of their assets (either a straight line rate or declining
balance rate). They do so for both convenience and certainty. The Commissioner's
depreciation rates are based on the effective lives of assets.

In many cases the schedule cannot be used, either because the particular asset is not
listed, or because it would simply not be possible to ascribe a rate of write-off to an
asset because of its unique nature - a mine, for example - or because of its
particular circumstances of use.

As noted in A Platform for Consultation (page 91), the Commissioner of
Taxation is, as a matter of good administration, working to update and expand the
depreciation rate schedule to ensure that it is as representative and comprehensive as
possible. An updated schedule will provide taxpayers with information on assets to assist
them in determining write-off rates for taxation purposes.

The Commissioner is working to publish a revised schedule by 30 June 2000,
with those revisions to be undertaken in consultation with relevant groups of industry
bodies.

Because additional assets will be brought into the effective life regime, revised
guidelines are required to provide taxpayers with an appropriate basis upon which
self-assessment can apply in relation to those assets and upon which the Commissioner of
Taxation could provide rulings in particular cases. For example, taxpayers will require
guidance to self-assess the depreciation rates of particular assets (such as new
buildings), other structures (such as runways) and particular projects (such as a mine).
While in some cases the accounting standards may provide some guidance, taxpayers will
need to be confident that these are regarded as appropriate for taxation purposes.

Requiring taxpayers to indicate on their income tax returns that they have elected to
self-assess depreciation rates would provide a reference point for ATO audits.

(i) taxpayers be permitted to vary depreciation rates, either up or
down;

(ii) the Commissioner of Taxation publish separate guidelines to assist
taxpayers to determine the conditions under which depreciation rates can be varied; and

(iii) taxpayers be required to indicate in their income tax returns whether
there has been any variation to the depreciation rates of their assets since their
previous return.

Market or technological developments, or other factors connected with usage, can
influence the rate at which an asset may lose economic value. It is, therefore,
appropriate that such factors be recognised by the tax law.

Where the effective life of an asset has been reduced below that determined at the time
of acquisition or construction, the taxpayer should be able to increase the rate of
write-off by re-assessing the effective life of the asset. Variation of depreciation rates
is also a requirement for accounting purposes.

Where an asset has been improved (or modified), rather than treating the improvement as
a new asset, the impact of the improvement on the remaining effective life of the original
asset should be assessed and, if its life has been extended, its rate of write-off
modified accordingly. In such cases, the tax value of the improved asset will be the cost
of the improvement plus its opening tax value in that year. Such an approach is consistent
with accounting practice.

Where taxpayers choose to re-assess the effective lives of their assets, that
re-assessment should be indicated on their annual returns. This will provide information
for the ATO to assess the extent to which this mechanism is being used and to audit the
way in which it is being used.

(i) consistent with existing law - at the time the depreciable
asset is first used for business purposes or installed ready for use; and

(ii) in the case of partially completed assets, where some separately
identifiable part or segment of the asset is in use - from the time such use
commences, with deductions allowed in respect of the portion being so used.

Taxation depreciation is provided because economic losses are incurred where an asset
is being used up. Normally, such losses do not arise while an asset is being constructed.
On the contrary, the economic value might be expected to increase during construction.
Allowing tax deductions in these circumstances would generally be inappropriate.

Buildings and structures are sometimes brought into income-producing use before their
overall construction is completed - for example, car parks in a shopping centre.
Consistent with the accounting treatment, deductions will be allowable for the
construction costs attributable to the part brought into use.

That taxpayers be given the option of writing off depreciable assets on
the basis of prime cost or diminishing value.

For plant and equipment, taxpayers may depreciate particular assets on either the prime
cost (straight line) or diminishing value methods. Once an election is made, it is
irrevocable. Other capital allowances use the prime cost method only.

There is a case for providing taxpayers with a choice between the two approaches for
all depreciable assets -- including new buildings, structures, assets subject to the
prime cost rules under the existing mining provisions and some intangible assets that
attract write-off allowances, such as patents and copyright.

Such an approach would provide neutral treatment between the taxation of different
classes of assets, including where an asset is a right to use a physical asset.

(ii) be pooled only where expenditures do not form part of the tax value
of other assets; and

(iii) if pooled, be written off on a diminishing value basis at a rate
determined by the effective life of the project.

Enabling taxpayers to write off a range of expenditures through a project development
pool provides a mechanism to address one part of the blackhole problem referred to in APlatform for Consultation (pages 100-102) and addressed generally at
Recommendation 4.14 of this report.

Many project development costs are blackhole expenditures or are subject to special
provisions, such as those relating to mining. Expenditures to be covered by the `project
development pools' would include costs for public roads, feasibility studies, costs of
acquiring mining and prospecting information, site preparation, government approvals and
contributions, and so on.

Separate pools could be employed where expenditures are more appropriately ascribed to
sub-projects, which may have different effective lives from the project as a whole -
for example, expenditures relating to a discrete ore body within a larger mining project.
Separate pools would address problems in the mining sector where, under the existing
provisions, certain assets have a much shorter life than the whole project but are
required to be linked to the life of the whole project.

It is expected that project-related plant and equipment would be written off in the
normal way where their working lives are not directly related to the project in which they
are employed.

The concept of the pool would include the polar case of a single item of eligible
expenditure. For example, where expenditure linked to a particular activity has been
incurred and that expenditure cannot be linked directly to a physical asset or right and
where the associated asset has a significantly different life to that of the overall
project.

Where an item from the pool is disposed of, the receipts would reduce the value of the
pool. If the pool were to have a negative value, that amount would be taxed. Where the
project is disposed of, the project development cost pool is to be ascribed value for
disposal purposes and the difference between that value and the tax value of the pool
would be treated as a single asset in the normal way.

(a) That taxpayers be given the option to pool all (and only all)
individual depreciable assets costing $1,000 or less.

Treatment of pooled items

(b) Where taxpayers elect to pool low-value items, the following
treatment apply:

(i) depreciate the pool, using the declining value method, at the rate
of 37½ per cent;

(ii) in the year of acquisition, write off items at half the rate
applicable to the pool -- that is, 18¾ per cent;

(iii) include in the low-value pool, at the taxpayer's option, existing
assets with an opening tax value of $1,000 or less which are being depreciated under the
declining value method;

(iv) if a low-value pool asset is disposed of, reduce the closing tax value
of the pool in the year of disposal by the amount of proceeds; and

(v) if the pool has a negative value at the end of an income year, include
a corresponding amount in taxable income.

Treatment where election not made

(c) That where taxpayers elect not to use the pool, all items costing
less than $1,000 be required to be written off over their effective lives.

The question was raised in A Platform for Consultation (pages 95-96)
whether there should be immediate write-off for low-value items. Maintaining individual
records for low-cost items for taxation purposes can impose significant compliance costs.
Providing immediate write-off for such items would, however, provide undue tax benefits
for those who are significant investors in low-value items and provide scope for tax
avoidance.

The recommended pooling approach is designed to strike an appropriate balance between
taxpayer equity and tax system integrity, while also achieving the principal objective of
reducing compliance costs.

Taxpayers will be allowed to pool assets where they cost $1,000 or less. This option
will replace the existing provision under which items costing less than $300 can be
expensed. The use of pooling for assets costing $1,000 or less will not be mandatory, but
where taxpayers elect not to use the pool they will be required to depreciate each item
separately according to the rate of depreciation determined by its effective life.

Under the diminishing value depreciation method, taxpayers have to continue to
depreciate assets until disposed of, or scrapped. This can impose compliance costs upon
taxpayers. Providing taxpayers with an option to include assets with opening tax values of
$1,000 or less in the low-value pool will provide a mechanism for taxpayers to simplify
the record keeping in relation to low-value assets for taxation purposes. Under the
accounting standards, depreciation of assets is only required where it is material.

Where a pooled item is expected to be partially used for private purposes, only that
proportion of the asset reasonably expected to be used for business purposes will be
eligible for pooling. For example, if there is a reasonable expectation that a mobile
phone costing $500 will be used 30 per cent for private purposes, $350 would be
eligible for pooling. If such an item is disposed of, the proceeds would reduce the
closing tax value of the pool by the proportion of the cost taken into the pool. If that
proportion cannot be reasonably determined, the closing tax value of the pool will be
reduced by the total amount.

The 37½ per cent depreciation rate being recommended is equivalent to a
4-year prime cost write-off. For some assets, this rate of depreciation may be accelerated
from effective life, for others it may be less generous. The trade-off recognises that the
existing $300 limit is being removed.

Applying 50 per cent of the pool depreciation rate to assets in the year of
purchase overcomes the need to pro-rate deductions and is consistent with the
simplification aim of this measure.

Providing for the proceeds of disposals of low-value items to reduce the value of the
pool is also consistent with lowering compliance borders. Items will only need to be
identified as low-value items at the time of disposal. No other details, such as dates, or
values at time of purchase, will be required.

(a) That when wasting assets are disposed of, the balancing adjustment
difference between their opening tax value in the year of disposal and their disposal
proceeds add to or subtract from taxable income in the year of disposal.

Exceptions to income recognition

(b) That exceptions to paragraph (a) apply where:

(i) an asset is involuntarily disposed of - see Recommendations 5.8
and 5.12;

(ii) certain primary producer provisions apply; and

(iii) assets are subject to special pooling arrangements -- see
Recommendations 8.9, 8.10 and 17.3.

Exclusion from capital gains taxation

(c) That assets eligible for depreciation allowances not be eligible for
the capital gains treatment set out in Section 18.

Transition on removal of indexation

(d) That, for depreciable assets acquired before the date of effect in
paragraph (e), the balancing adjustments in paragraph (a) exclude any indexation
slice as at the date of effect -- that is, any amount of the disposal proceeds between the
original cost base and the indexed cost base for current CGT purposes.

Date of effect

(e) That these new arrangements apply with respect to disposals of all
depreciable assets made after the date of announcement.

Under existing law, when an asset is disposed of, the depreciation balancing adjustment
allows a deduction for the excess of depreciated value over disposal price or includes in
assessable income the excess of disposal price (up to original cost) over depreciated
value. Any excess of disposal price over the indexed CGT cost base is also included in
assessable income. However, taxpayers can defer tax on additions to assessable income from
the balancing adjustment by electing for balancing charge offset.

The offset allows taxpayers to set otherwise assessable balancing charges successively
against the cost of replacement assets, the cost of other new assets or the depreciated
value of other assets. Balancing charge offset, however, does not apply uniformly to all
classes of assets - it applies only to plant and equipment.

No conceptual basis supports the availability of balancing charge offset. It allows
some taxpayers duplicate tax benefits: from tax deferral on their assets attracting
accelerated depreciation allowances; and the further tax deferral provided by the offset
if the assets are sold on the second-hand market. But taxpayers with assets which attract
little acceleration of depreciation or have no effective second-hand market do not benefit
from the offset.

The current arrangements are inequitable, add complexity and underwrite duplication of
tax benefits. Duplicate tax benefits arise because not only do some taxpayers get the
benefit of accelerated depreciation, but they also get an additional tax deferral when
they sell the asset.

The recommendations will not disturb certain specific primary producer provisions, such
as those relating to water storage and reticulation expenditure, where special provisions
will continue to apply. Those provisions operate to attach eligibility for deductions to
the taxpayer who incurs the expenditure, such that no balancing adjustment is made upon
disposal.

Currently, capital gains indexation of depreciable assets that also receive accelerated
depreciation can result in a triple benefit for those taxpayers that dispose of assets for
more than their original cost. This arises from the tax deferral from accelerated
depreciation, the balancing charge offset and the tax-free indexation slice. There is no
apparent reason in equity for such treatment.

The current treatment of disposals of depreciable assets also can be complex to comply
with because some disposals can be subject to both the capital allowance and CGT
provisions of the law. This means that even though the assets are depreciable, records of
original cost must be maintained on the chance that it may be disposed of for a
consideration in excess of its original cost base.

Under the Review's recommendations, continuing indexation will no longer be available
(indexation to 30 September 1999 will still apply) and balancing adjustments will be
recognised at the time of disposal, with a consequent reduction in record keeping
requirements. Only the annual tax value will need to be tracked with the final tax
position determined by comparing sale value with tax value.

Under existing law, taxpayers have the option to elect to use the offset at the time of
disposal. That election will be removed from the time the new law takes effect. Its
removal will contribute to the funding of the transitional costs of moving to a lower
corporate rate.

Small businesses that decide to use the simplified depreciation system under
Recommendation 17.3 will be able to continue to elect to use the balancing charge offset
for eligible assets.

Taxpayers will be able to retain the indexation benefits up to the date of effect of
the removal of the balancing charge offset -- with those indexation benefits taken
into account in the event that the depreciable assets are disposed of for more than the
indexed cost base as at the date of effect.

Capital gains realised on the disposal of pre-1985 depreciable assets will continue to
be exempt from taxation. However, as with other depreciable assets, the option to offset
any balancing charge will be removed.

That buildings and structures commenced to be constructed on or after
the date of effect of the new legislation be subject to the general depreciation regime
applying to depreciable assets, including effective life write-off.

That the Government undertake further consultation with the objectives
of:

(i) simplifying the law as it applies to existing buildings and
structures; and

(ii) developing options to bring existing buildings and structures into
the general depreciation regime.

A Platform for Consultation (pages 109-110) noted that a range of problems would
be resolved were the taxation treatment of buildings and structures to be folded into a
general depreciation regime.

As a general proposition, the Review considers it is appropriate for buildings and
structures to be accorded the same taxation treatment as other depreciable assets. Those
parties making submissions to the Review shared this view.

The current treatment that provides a fixed annual rate of taxation depreciation based
on the original cost of a building or structure can distort investment decisions and
reduce economic efficiency. As noted in An International Perspective (pages
74-76) the majority of countries, including the United States, allow deductions based on
actual acquisition cost to the taxpayer.

A Platform for Consultation (page 94) canvassed two options for the
taxation treatment of buildings and structures:

(i) to apply the standard depreciation treatment only to new buildings and structures;
or

(ii) to apply the standard depreciation treatment to all buildings and structures
constructed or acquired after the commencement of the new law.

Ideally, the Review would have preferred Option (ii). However, the additional
revenue cost of bringing all existing buildings and structures upon resale into the new
regime -- on the basis of limited data, possibly building up to about $1,500 million
by 2009-10 -- would have seriously compromised the Review's revenue neutrality
constraint.

The Review's recommendation concerning the taxation of existing buildings and
structures is that they would retain their existing treatment. Accordingly, disposals
would continue to be subject to capital gains tax treatment, including the reforms being
recommended by the Review (see Section 18).

The Review accepts that continuing the existing taxation treatment for the existing
stock of buildings and structures will continue to distort the market for such assets.
However, as noted below, the existing law is very complex and to add a further layer of
complexity at this time would be unacceptable. It is for this reason that the Review is
not recommending that taxpayers be required to separately calculate the gains and/or
losses from the separate land and building components where the composite asset is being
disposed of. To do so could impose significant additional compliance costs on taxpayers.

 Any excess deductions claimed on buildings and structures acquired
before 13 May 1997 are not taxed if the disposal price exceeds the reduced CGT cost base.

 Improvements to buildings and structures made before 1 July 1999 on
property acquired before 13 May 1997 are not taxed if the disposal price of those
improvements exceeds their reduced CGT cost base.

The range of taxation treatments applying to buildings and structures creates
considerable compliance complexity where a property is improved -- for both the
original and subsequent owners. For example, taxpayers have to maintain records for each
improvement as if it were a separate asset for depreciation purposes and such records must
be passed on to each subsequent owner. The law provides no mechanism for records to be
amalgamated or simplified for subsequent owners.

As noted, the revenue neutrality constraint means that the Review is unable to
recommend that existing buildings and structures be brought into the general depreciation
regime. The preliminary estimate of a high cost to revenue arises because, based on the
advice from the property sector, commercial buildings may depreciate at a rate higher than
that implied by the current 40-year write-off. An element of the potentially high cost to
revenue is the lack of full taxation on the disposal of existing commercial buildings and
structures. Providing declining balance depreciation, available under the general
depreciation regime, would also contribute to the relatively high cost to revenue.

The Review notes that the high cost of bringing existing buildings and structures into
the general depreciation regime could be lowered -- but not eliminated -- if all existing
buildings and structures (excluding land) were subject to full taxation upon disposal.
Full taxation would mean all gains upon disposal, including those applying to pre-1997 and
pre-1985 buildings and structures, would be taxed.

Such an approach would simplify the operation of the law for subsequent owners of
existing buildings and structures. However, removing or modifying tax preferences on
existing assets would be contentious because it could be regarded as being retrospective.

Bringing new buildings and structures into the general depreciation regime raises
several practical, administrative and taxpayer compliance issues that will need to be
considered before the measures can be implemented.

The Review has been advised that the majority of taxpayers would be likely to adopt the
Commissioner of Taxation's depreciation rate schedule for buildings and structures.

The compiling of a depreciation rate schedule for buildings and structures is,
therefore, an important issue.

Research is being undertaken by the industry, which will be forwarded to the Government
when completed. That will assist the Commissioner of Taxation in updating the depreciation
rate schedule to include buildings and structures.

Consistent with the depreciable assets regime, taxpayers would also have the option to
self-assess the depreciation rates if those rates were not appropriate to their individual
circumstances. Guidelines will also need to be developed to enable taxpayers to
self-assess on a basis that will be acceptable to the Commissioner of Taxation.

Subjecting buildings and structures to the normal depreciation provisions will mean
that taxpayers would need to undertake separate valuations for the land, on the one hand,
and the building and other depreciable asset components on the other. Of particular
importance would be mechanisms to apportion the value of land to high-rise strata title
properties. Taxpayers would need guidelines to assist them in providing valuations that
are acceptable for taxation purposes. Such guidelines would need to have regard to the
integrity of the tax system and relevant commercial considerations.

The Review considers that before there can be a comprehensive reform of the taxation
treatment of buildings and structures, more comprehensive data need to be assembled and
various options for simplifying the existing law need to be explored with taxpayer groups.

To provide a reliable basis for estimates of the tax revenue consequences of bringing
the existing stock of buildings and structures into the general depreciable assets regime,
more comprehensive and reliable information is needed about effective lives and market
values of the properties and their rate of turnover. Such information is currently not
available from the ATO or other official sources.

One option to simplify the law could be to amalgamate the various provisions applying
to existing buildings and structures, and improvements to them. Matters to be considered
could include, but need not be limited to, the following:

 eliminating the grandfathering of existing arrangements as
mentioned above;

 consolidating existing buildings and structures and their
improvements into single assets to which common depreciation rates and disposal rules
could be applied; and

 an optional pooling of all costs comprising the depreciable
component of buildings and structures to which a common rate of depreciation might be
applied.

Consultation on reform of the taxation of existing buildings and structures could be
conducted through a working group of specialists with detailed knowledge of the property
market. Among other tasks, the group could:

 develop the appropriate criteria for the determination of effective
lives from which taxpayers could self-assess should they so elect; and

 consider valuation issues, and in particular the development of
guidelines to assist taxpayers to allocate the cost of a building between its various
components -- namely, land, the structure and plant.

The proposed commencement date for bringing new buildings and structures into the
comprehensive wasting assets regime is recommended to be the date of effect of the new
legislation.

The reform of the taxation treatment of existing buildings and structures would depend
on progress made with respect to the range of issues identified by the Review and
subsequent decisions by the Government.

In A Platform for Consultation (pages 111-114), the Review noted that the
current taxation treatment of expenditure on, and income from, the exploitation of
minerals and petroleum resources is inconsistent and distortionary.

Currently, expenditure on plant is deductible in the same manner as for other taxpayers
generally. Other capital expenditure on developing and operating a project (allowable
capital expenditure) is deductible over the shorter of the life of the project or
10 years, or 20 years in the case of quarrying. Expenditure on infrastructure
for transporting mineral and quarry materials away from the site is deductible over
10 years in the case of mining and 20 years for quarrying, irrespective of the
effective life of the assets.

In principle, the cost of all such assets should be deductible over the shorter of the
effective life of each asset and, where the asset will be abandoned at the end of the
project, the life of the project. That means that assets with an effective life shorter
than project life or the 10/20 year `cap' ought to have higher write-off rates than
at present while those with effective lives longer than project life or the cap ought to
have lower rates than at present.

Under the current law, where only a part of a mining or quarrying site is closed down
or abandoned, the undeducted costs in relation to that part have to be deducted over the
remaining life of the continuing part. Under the effective life model proposed for
depreciable assets, such undeducted costs will immediately reduce taxable income.

In some instances, expenditures incurred to develop and operate a project might not be
readily attributable to particular assets - for example, contributions to local
authorities for access road maintenance. Such expenditures will be able to be written off
under Recommendation 8.9 through the `project development cost pools'. This approach
will also enable other blackhole expenditures, where they relate to the life of the
project, to be written off over the life of the project - for example, a feasibility study
for a new mine. As with other assets subject to the depreciation rules, such expenditures
will be able to be written off using the diminishing value method.

Currently, expenditure on acquiring mining, quarrying or prospecting rights or
information from another person is treated as development expenditure and so is deductible
over the shorter of the project life and the 10/20 year cap irrespective of the
actual benefit produced by the expenditure. As well, a limit applies to the deductible
amount. Broadly, the deductible amount is the lower of the price paid and the sum of
deductible development expenditure incurred by the vendor in respect of the asset and any
other undeducted exploration and prospecting expenditure that the vendor agrees to
transfer to the purchaser. Any excess is either deductible as a capital loss at the end of
the project or is not deductible at all.

Such expenditure ought to be treated consistently with other expenditure and without a
limit applying. For example, so much of the expenditure that relates to tangible assets
such as access roads, mineshafts and buildings ought to be deductible over the shorter of
the asset's effective life and project life, where the asset has no further effective life
beyond that of the project. Expenditure on information should be treated according to the
benefit obtained from that information. If the information relates to exploration and
prospecting activities, it should be immediately deductible (consistent with retaining the
current immediate write-off of the treatment of exploration and prospecting
expenditure -- see Recommendation 4.3(v)). If it relates to an existing mine, it
should be deductible over the life of that mine. Otherwise, it should be immediately
deductible.

The effective life of a mining or resource project will be self-assessed by taxpayers
in accordance with guidelines which it is recommended should be developed in consultation
with the industry and published by the Commissioner of Taxation.

Submissions received from the mining industry argued that, in recognition of the higher
risks often associated with mining projects, a limit ought to be placed on the period of
write-off of expenditure on developing and operating mining projects. This particular
concern is addressed more generally through Recommendation 8.6, which would allow
taxpayers to reassess effective lives - and hence write-off rates - during the life
of a project should economic circumstances change.

That all receipts from the sale of mining information be subject to
taxation.

Currently, many receipts from the sale of mining/quarrying information are not taxable
under either the ordinary income or capital gains tax provisions. In principle, all
business receipts should be taxable with deductions being allowed for the costs of earning
those receipts.

Much expenditure on acquiring information for future mining/quarrying is currently not
deductible. Nor would such expenditure create a loss for capital gains tax purposes. Under
the cashflow/tax value approach, all expenditure on mining/quarrying information will be
deductible. Expenditure on creating information through exploration and prospecting is to
remain immediately deductible. Expenditure on acquiring information from another person
will be deductible (see Recommendation 8.15).

That the excess deduction rules be repealed from the date of
announcement.

Unless an election is made, deductions for exploration and prospecting expenditure and
allowable capital expenditure are currently limited to the amount of available income. The
excess deductions are carried forward for successive deduction in following years until
fully absorbed.

Where an election is made, the limits do not apply, and any resultant losses are
available for transfer under the group company loss transfer provisions.

The excess deduction rules are, in effect, a loss carry-forward mechanism, separate
from the general provisions for company and trust losses. They were enacted before the
1990 removal of the 7-year limit on the carry forward of non-primary production losses to
recognise that the mining sector might not be able to use early year losses fully within 7
years.

As well, the excess deduction rules facilitate agreements for the transfer of deduction
entitlements from vendors to purchasers of mining, quarrying or prospecting rights and
information. A vendor of such assets can agree to attach undeducted unsuccessful
exploration and prospecting expenditure to assets being disposed of. The Review is
recommending that the full cost of acquiring mining or quarrying rights and information be
deductible as outlined in Recommendation 8.15 -- so the remaining reason for
retention of the excess deduction rules will be removed.

Submissions to the Review stated that the excess deduction rules ought to be retained,
but provided no reasoning to support this proposition. As the rules have been open to
exploitation and are no longer necessary, the Review is recommending that they be repealed
from the date of announcement. To defer implementation would allow taxpayers to further
exploit the provisions, to the detriment of the revenue.

That taxpayers be required to bring to account the cost of `advance
work' on the removal of minerals performed on or after 1 July 2000.

Mining operations often necessitate significant levels of advance work on the removal
of overburden. Currently, the cost of such work is immediately deductible to the taxpayer
performing the work -- contributing to the cost of `trading stock' at the
time -- even though the benefit is sometimes consumed only as the minerals are
extracted.

Despite this, the value of `unconsumed' removal of overburden would be included in the
cost of acquiring a property. This value is then part of the cost base of the purchaser
and is effectively not deductible to the purchaser until the property is disposed of.

The benefit arising from advance work on the removal of overburden will be an asset
under the cashflow/tax value approach. As such, deductions should only be taken when the
asset is consumed. That occurs when the prior removal of overburden assists the extraction
of minerals for sale or consumption. The `consumption' of the relevant part of prior
overburden removal would be included in the cost of the trading stock at that time. This
approach is consistent with that adopted for accounting purposes.

Under the cashflow/tax value approach, the unconsumed benefit of removing overburden at
year-end is to be valued at cost. That cost would be absorbed into the cost of the
minerals as they are extracted so that a deduction would be allowable, in effect, only at
the time that the minerals are either sold or consumed.

In some forms of mining, overburden is removed so as to access the whole of the ore
body. It might be simpler in that case to allow the cost of overburden removal to be
amortised over the life of the ore body rather than requiring it to be allocated to the
cost of production.

Under the cashflow/tax value approach, the treatment of the sale and purchase of
properties upon which there is an unconsumed benefit of removed overburden at the time of
sale will be as follows.

 For the vendor, the portion of the disposal proceeds attributable
to the benefit will be assessable and the undeducted cost of the work will be deductible.
Currently, the amount attributable to the benefit would be taxable under the capital gains
tax provisions.

 For the purchaser, the price paid for the benefit will be either
allocated to the cost of production or amortised over the life of the ore body, as
appropriate. The method chosen will be at the election of the taxpayer. Currently, the
cost of the benefit is effectively not deductible until the property is disposed of.

The reform might have a significant impact on some taxpayers if it were to apply to
work already performed. Accordingly, the Review recommends that it apply only to work
performed on or after 1 July 2000.

That the 125 per cent research and development (R&D) tax
concession be retained and be made available to all entities that are taxed as companies.

The objective of the 125 per cent R&D tax concession is to encourage
innovation. Government support to the R&D sector has been the subject of a series of
reports and studies over the years culminating in the Mortimer review of industry policy.
In the subsequent release in December 1996 of the Investing in Growth policy
statement, the Government decided to retain the tax concession at 125 per cent,
but to increase outlays to the sector through the Innovation Investment Fund
program.

The Government has indicated its policy intention to retain the R&D tax concession.
The Review has not attempted to assess the merits of the current arrangements. However,
including trusts in a consistent entity tax regime requires the extension of eligibility
for the R&D concession to trusts.

(a) That taxpayers using luxury cars in the business of short-term
multiple hire -- defined as a period of one month or less - not be subject to
the luxury car limit.

Date of effect

(b) That the commencement date be 1 July 2000.

The luxury car limit has been a feature of the law since 1979. The policy recognises
that there is an element of private consumption where luxury cars are otherwise being used
for business purposes. The current law is drafted so that the restriction applies
irrespective of the use of such vehicles.

Under the existing law, cars that have an opening tax value in excess of a specified
limit -- $55,134 for 1998-99 -- may only claim tax depreciation based on that limit. The
limit is indexed annually. For example, if a car costs $70,000, its opening tax value
would be $55,134.

Except where cars have been modified to transport disabled persons in wheelchairs (see
below), this limit applies even where the car is used directly by a business -- such as a
hire car firm -- to earn income.

The Review's recommendation will allow the full cost of acquisition to be the opening
tax value. It will apply only to taxpayers that are either in the business of conveying
passengers on a short-term hire basis, or hiring out vehicles on a short-term basis to
unrelated persons. The Review considers that to deny taxation based on the full cost of
their business investment is inconsistent with reform measures to allow taxpayers to base
their tax depreciation on the cost of their assets.

The Review, however, recognises that to remove the limit in all cases would be
inconsistent with the long-standing policy with respect to luxury cars. Accordingly, the
removal of the limit will not extend to cases where a taxpayer uses a luxury car --
chauffeur driven or otherwise -- in his or her business where that business is not
primarily one of short-term hire for reward. `Short-term' will be defined as a period of
one month or less.

(i) where a non-luxury car has been modified by a taxpayer with a
disability to enable it to be used for business purposes; and

(ii) as a result, the opening tax value of the car exceeds the luxury
car limit.

Date of effect

(b) That the commencement date be 1 July 2000.

Under the existing law, the luxury car limit does not apply where a car has been
modified to transport people with disabilities in wheelchairs. The limit, however, applies
where a car has been modified for use by a person with a disability in his or her
business.

The Review considers that where a non-luxury car has been modified to enable a disabled
person to use it for business purposes so that the opening tax value of the vehicle
exceeds the luxury car limit, that limit should be increased to cover the cost of
modifications necessary to enable the car to be used by the disabled person. To qualify
for increased tax depreciation, the modifications should be associated with the disability
of the taxpayer and not other purposes.

The recommendation means that the existing taxation treatment of goodwill would
continue.

As noted in Chapter 4 of A Platform for Consultation (page 136), under the
current law acquired goodwill is taxed as follows under the CGT provisions:

 the proceeds are taxed as capital income to the vendor; and

 the consideration forms the cost base to the acquirer.

There are no provisions to allow taxpayers to deduct or amortise the cost of acquired
goodwill.

As goodwill (however defined) can only be accurately valued upon realisation,
attempting to estimate the annual change in value of goodwill does not appear to be a
practical proposition. It would also conflict with the Review's support for generally
taxing gains on assets, other than some financial assets, on a realisation basis.

From a practical perspective, acquired goodwill is normally purchased along with other
assets (both tangible and intangible) of a business. As goodwill has no precise meaning,
its acquisition cost is the residual amount remaining, consistent with the accounting
treatment, after precise values have been allocated to other assets.

Experience with the CGT goodwill provisions points to significant practical
difficulties in ascribing valuations to goodwill in particular cases; so much so, that
cases have been litigated as far as the full bench of the High Court (A Platform
for Consultation, pages 136-137).

Under the AASB 1013 Accounting for Goodwill issued in June 1996, purchased
goodwill must be amortised on a straight line basis, over the period during which the
benefits are expected to arise. This period must not exceed 20 years from the date of
acquisition (A Platform for Consultation, page 139).

There is no common approach to the taxation of goodwill internationally. The
international treatment of goodwill is set out on pages 74 and 75 of An International
Perspective. In half of the jurisdictions surveyed, acquired goodwill is not
deductible. Other countries -- including the United States, Canada, Germany and
Japan -- allow amortisation over periods ranging from 5 to 20 years.

The reforms to the taxation of certain rights (such as restrictive covenants) will mean
that in some cases taxpayers will be able to write off expenditure that previously may
have been loosely characterised as goodwill.

Recommended changes to the treatment of capital gains will mean that, in some cases,
more generous relief may be available where acquired goodwill is disposed of.

Submissions to the Review generally, but not exclusively, favoured allowance for tax
depreciation of acquired goodwill. On balance, because of the cost to revenue --
which, it has been estimated, could run into billions of dollars over time -- and the
granting of deductibility to blackhole expenditures, the Review has decided that the
existing treatment be retained. It does so with the proviso that the scope for
amortisation treatment be re-examined should the current reforms prove to be more revenue
positive than the estimates included in this report.

In coming to this conclusion, the Review recognises that this treatment disadvantages
Australian entities in competitive takeover situations where they are competing with
bidders based in jurisdictions that provide taxation depreciation for acquired goodwill.
This has become more significant with the change in accounting standards referred to
above.